Timber News

Reprinted with Permission

The rapid rise of TIMOs may be slowing; U.S.-based investors face diverse global competition for offshore timberland

Oct 6, 2006 - Forestweb
By Audrey Dixon

SAN DIEGO, October 6, 2006 (Forestweb) - The hunt for timberland properties for investment is moving offshore, and transactions are likely to become even more creative and complex than they are now.

Addressing the third World Forestry Center's 'Who will own the forest?' conference in Portland, Ore., last month, Robie noted that of the 18 Timber Industry Management Organizations (TIMOs) tracked by her company, seven did not exist three years ago and 13 did not exist 10 years ago.

In her presentation on the 'Top Ten Trends in Timber Investing and What They Suggest for the Future,' Robie observed that the prospective source of returns in timberland transactions had shifted in recent years from an almost total reliance on timber earnings to a much heavier emphasis on HBU land.

And beyond the "little matter of IP [International Paper Co.]," which is currently selling off most of its 6.8 million acres of U.S. forestland, Robie said there would be little flow from the U.S. industry; inter-investor transactions would be more common; and that "The hunt is moving offshore."

Robie noted that, after the IP transaction closes, TIMOs will have almost $24 billion in assets under management (AUM), compared to $17.4 billion as of June 2006 and less than $4 billion at the end of 1996.

TIMO investment at present is heavy to the southern U.S., accounting for $7.3 billion, then the U.S. Northwest at $4 billion, New Zealand at $1.7 billion, the U.S. Northeast at $1.5 billion, with "other" North America, South America and Australia each accounting for $1 billion or less, according to Robie's presentation. But in future there will be a higher proportion outside the U.S.

From a position of secrecy and skepticism when TIMOs first started out, today they are showing more co-operation with each other and this will also increase in future, she suggested.

According to Deutsche Bank Equity Research, in a Sept. 22 research note on the conference, the better run and more prudent TIMOs and their clients should survive the current turbulence as the best of the TIMO managers offer realistic expectations about the return potential on timberland and its risks.

"Investing in trees with a 20-50 year growth cycles isn't a 'no brainer'. It is a long-dated investment with limited liquidity and a large dose of commodity price risk," said Deutsche Bank, noting that timber is a bulky commodity, timber values are volatile, end markets can shift unexpectedly and issues such as foreign exchange can be "game changers".

Deutsche Bank believes some of the largest recent U.S. land investors have included wealthy families from around the world as well as some of the world's largest foundations and educational institutions, "The type of investors for whom timberland as a portion of an investment portfolio makes sense," it said.

Global competition for timberland fierce

Dennis Neilson, Director of DANA Ltd. based in Rotorua, New Zealand, presented to the forestry conference a list of 27 North American TIMOs, REITs and funds, of which 12 currently have an interest in offshore timberlands. These include Hancock Timber Resources Group, Wagner FM Group, Global Forest Partners LP, GMO Renewable Resources, Global Environmental Fund, Fountain Forestry Inc., Brookfield Asset Management (formerly Brascan Corp.), Acadian Timber Income Fund, Rayonier Inc., Harvard Endowment Fund and Ontario Teachers Pension Plan.

In addition, there are many non-U.S companies, funds and endowments seeking timberland investments overseas, said Nielson.

He gave as examples Japanese trading/paper companies, that at the end of 2005, had 530,000 acres in eight countries, with plans for 1 million acres; South Korean companies, such as Korindo which in late August announced plans to establish 1.25 million acres of plantations in Indonesia; Norwegian companies, and Finland's Stora Enso; Indian companies such as Aditya Birla in Laos and Ballarpur Industries Ltd. in Asia; Australian banks and private equity funds such as Macquarie Bank; Churches; and Chilean companies such as Arauco and CMPC.

Companies in Chile, Spain, Brazil and Portugal, however, appear to have a different philosophy to the one prevailing in much of the world at present, where most forest companies have aimed to "crytallise the value of their timberlands to satisfy the demands of Wall Street and its equivalents," Nielson said.

Chilean timberland giants Arauco and CMPC are timberlands builders in their home base and overseas, not sellers, as are Brazilian giants Aracruz, Klabin, Suzano and VCP/Votorantim.

Similarly, Spanish company Ence and Portuguese company Portucel maintain their timberlands.

"What can Wall Street learn from these examples?" Neilson asked. "Have they discovered a sustainable corporate ownership model? Or is another round of major institutional purchase opportunities coming up?"

Looking at the fundamentals of timberland ownership, Nielson said that, in 2003, almost all global plantation IRR returns were less than 7%--and many were 1%-4%. The only ones higher were in less stable countries--e.g. teak in Cambodia, he said.

"HBU, luck and creative accounting can 'paper over' the fundamentals for a while, but what will happen if or when the lemon has been fully squeezed, and the music stops?" asked Nielson. "Who gets left out on the dance floor?"

While some of the more experienced timberland investors are actively addressing this question now, others are not, and Nielson questioned when fundamentals would return to some analysts' spreadsheets.

In summary, he asked, "How far around the wheel have we gone in USA and in (some) international timberlands ownership?" He outlined the path as follows:

• Government forests; forest products companies with little debt;
• Forest products companies with lots of debt;
• TIMOs/REITs with no or modest debt;
• Private hedge funds with "debt up to the eyeballs";
• Complicated tax deals and IPO spin-offs.

But, finally, when the lemon is fully squeezed, Neilson asked, "What then?" and whether the forests would return to forest products companies, governments, or small farmers.

"However, in 2006 at least, there still appears to be enough chairs--and the band continues to play on," Neilson concluded. "But when easy pickings dry up in the U.S., perhaps 2007-2010 will be an era of a major international timberlands investment focus."

Forestweb Editor's Note: Compiled from presentations given at the World Forestry Center conference 'Who will own the forest?', held in Portland, Ore., Sept. 11-13. For information on obtaining the full conference proceedings go to http://wfi.worldforestry.org/wwotf3/

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Reprinted with Permission